Visible on the horizon: Inflation

People are beginning to realize that the inflation joke is on them, with rising prices everywhere and deflation nowhere in sight. Plus: Words of wisdom on gold.

By Bill_Fleckenstein Apr 5, 2012 4:57PM

Bill FleckensteinI have owned gold and gold-related investments aggressively since 2001 for one main reason: the mismanagement at the U.S. Federal Reserve, with its unplanned and unarticulated determination to debase our currency and promote inflation.

 

Though we have had long periods of apparent stability, since 1971 stability has really been the case only when Paul Volcker was Fed chairman and immediately after his tenure.

 

The money-printing at the root of our problems essentially intensified exponentially under Alan Greenspan, and now Ben Bernanke, fueled particularly over the past four or five years by worldwide fears of deflation. The irony, of course, is that the fear of deflation guarantees inflation as central banks are willing to use the printing press with reckless abandon.

 

I think it is highly probable that the fears of a deflationary accident have passed, so folks might be more receptive to signs of inflation, which would certainly change the landscape in many markets.

 

(Post continues below video.)

No substitute for common sense

In Canada, where the Consumer Price Index is perhaps slightly less sanitized than in the U.S., inflation was reported on March 23 to have accelerated again in February due to higher costs for gasoline, electricity and meat. I thought it was interesting that a Bloomberg story blamed those items, because here in inflation-denying America, we discuss inflation only ex food and energy. In fact, one could argue that the Fed and those who worship it like to look at inflation only after stripping it ("ex" stands for excluding) of anything that has gone higher in price.

 

Of course, many companies have been affected by higher inflation already, not the least of which is ConAgra (CAG). I liked The New York Times' rendition of the company's recently lowered outlook: "Like all food companies, ConAgra, the maker of Banquet frozen meals, Chef Boyardee pasta, and Hebrew National hot dogs, has been hurt by soaring costs for grain, meat, and fuel."

 

The Fed: Giving credit where credit is due

As everyone knows, the cost of almost everything you need has been rising for some time, while certain assets, such as real estate, have declined. (The prices of electronic consumer products have also declined, because that is what technology does: get cheaper). In any case, it should surprise no one when I say that the problem facing us prospectively will be inflation, not deflation.

 

The Fed is going to be very slow in accepting any responsibility for that, as it has a long history of denying its role in past disasters. Just witness Greenspan's denial of his sins, not to mention Bernanke's remarks during his so-called University Lecture on March 22: ". . . the evidence I have seen suggests that monetary policy did not play an important role in raising house prices during the upswing."

 

Someone who can reach that conclusion is going to be rather disinclined to take any blame for a rise in consumer prices. Of course, given the way the U.S. CPI is constructed, it is very difficult to get it to register higher prices in the first place. Thus, inflation will be raging wildly long before any attempt is made to stop it.

 

Naturally, that will affect the bond market, which will eventually take the printing press away from the Fed, and hopefully bring a happy ending to this horror story.

 

Required reading

As for protecting yourself against the evils of inflation and currency debasement, this week I received a compelling email from a longtime friend and extremely successful professional investor. As a very smart guy with more than 40 years of experience in the investment world, his frank (even blunt) opinions are uncommonly valuable.

 

His email contained a brilliant perspective on the gold bull market, and I found it so relevant I am including a lengthy excerpt below (he uses a fair amount of "inside baseball" terminology, but hopefully you will get the gist):

 

"I think it might be important to put gold in a more easily understood form. Assume this was a persuasive growth stock with a compelling long-term story, priced within a very long, multi-year base between approximately $4 and $6 per share, with a convulsive 'bear trap' dip briefly below $3. This dip was widely attributed to Clinton's Treasury secretary (Robert Rubin) trying to drive the stock's price (i.e., gold's spot price) down to mask Greenspan's activity at the Fed.

 

"The bear trap snagged one of the slowest learners in the game. That slow learner had accumulated its position over about 500 years, but when the position finally bored the holder to death, he simply sold out -- on the exact low (i.e., the Bank of England selling gold around $260 -- $280 [finishing in 2002]; or in our illustration, around $2.75 per share).

 

"The newly 'discovered' stock finally broke out of its long-term trading range and began to attract interest. A long, multi-year, steady climb carried it to about $19, followed by a much-needed 'correction' back down to the $15-$16 area. Along the way, it saw several corrections of similar size and duration (20%-30% over several months). For example, a few years ago it declined from about $10 down to $7, scaring the wits out of long-term holders. The $7 sellers likely bought back in when it cleared the former high around $10.

 

"Therefore, I see no logical reason to assume any change in the long-term story -- crazed central banks, or that a normal 25% 'correction' signals the end of a very powerful, long-term chart pattern. The long-term trend definition remains intact, unlike the picture presented in 2006 when the thing broke 30% and turned down several trend definitions. In addition, I think recent sentiment surveys validate the idea that the gold complex is 'sold out,' leaving the line of least resistance up.

 

"Finally, from a fundamentalist point of view, the best thing that could happen would be a simultaneous rise in both gold and long-term interest rates. That would signal a long-awaited realization that inflation and not deflation was the boogey man. But we'll just have to stay tuned for that one."

 

I couldn't -- and didn't -- say it better myself.

 

On the air

On March 23, I did a short, impromptu interview with Eric King rebutting some of the positions Bernanke offered in his March 22 speech. Interested readers can find it here.

 

At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column. He did own gold.

 

This post is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.

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ABOUT BILL FLECKENSTEIN

Image: Bill Fleckenstein, MSN money

This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.

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